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As Growth in China Continues Will Chinese Airports Meet the Demand?

Presented by:

Dr. Jonathan BeardVice-President, ICF International

November 27, 2015

11

Historical global air traffic growth has been resilient, briefly interrupted by economic shocks and recessions

GLOBAL AVIATION INDUSTRY

Note: RPK (revenue passenger kilometers) equals the number of passengers multiplied by the journey length (km). It is a measure of demandSource: ICAO; IATA forecast as of December 2014; International Monetary Fund (“IMF”), World Economic Outlook, October 2014

Historical Traffic vs. GDP and GDP Growth

22

Industry forecasts predict a strong and continual increase in RPK growth globally between 4% and 5% per annum

GLOBAL AVIATION INDUSTRY

0

500

1,000

1,500

2,000

2,500

3,000

3,500

GDP History & Forecast

Traffic History

Airbus Traffic Forecast (4.7%)

Boeing Traffic Forecast (5.0%)

ICF Traffic Forecast (4.0%)

World GDP Growth and Air Transport World Traffic (RPKs)

Indexed: 1970 = 100

Note: RPK (Revenue Passenger Kilometer): number of paying passengers x kilometers flownSource: Airline Monitor, February 2015; Oxford Economics; World Economic Outlook, Airbus/Boeing/Embraer Market Outlooks, ICF 2014

ICF’s traffic forecast allows for lumpy economic growth and a weakening of the low-cost carrier cycle

WorldGDP

WorldTraffic

Forecast (2014-2034)

33

Projected global fleet growth is supported based on the number of aircraft orders and delivery numbers

Despite significant ordering in 2005-2008, OEMs have only recently increased production, substantially increasing the industry backlog to almost 12,000 aircraft as of January 2015

GLOBAL AVIATION INDUSTRY

0

200

400

600

800

1,000

1,200

1,400

1,600Boeing Orders Airbus Orders Boeing Deliveries Airbus Deliveries Total Deliveries

Boeing (1 Jan, 2015) Airbus (1 Jan, 2015)

629 Deliveries

1,456 Net Orders

340 Cancellations

723 Deliveries

1,432 Net Orders

118 Cancellations

Source: Airbus, Boeing, ACAS

44

Asia Pacific is positioned to continue the high growth experienced over the last decade with airlines achieving strong profits

AVIATION IN ASIA

Asia Pacific Airline Net Profits

2004-2015F

-$6

-$4

-$2

$0

$2

$4

$6

$8

$10

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F

Source: IATA Airline Industry Economic Report, December 2014

USD Billions

55

Asia Pacific leads the world in dollars spent on airport construction this year but not in total projects

0

100

200

300

400

500

600

700

800

Europe AsiaPacific

NorthAmerica

LatinAmerica

Africa MiddleEast

New Airports

Existing Airports

AVIATION IN ASIA

0

30

60

90

120

150

AsiaPacific

NorthAmerica

MiddleEast

Europe Africa LatinAmerica

New Airport Projects

Existing Airport Projects

All Airport Projects by Region

July 2015

Airport Construction by Region

July 2015 Number of

Projects

Investment

(USD)

Source: ICF analysis, CAPA

66

China, in particular, has seen incredible growth over the last decade in the number of airports in the country

AVIATION IN CHINA

100

110

120

130

140

150

160

170

180

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Number of Airports in China(2005 – 2015)

Note: Mainland ChinaSource: OAG, ICF analysis, CAPA

Chinese airports are projected to increase to 260 in 2020

The top 10 airports in China carry 49% of total passengers in China

In 2014, 64 airports had over one million passengers which handled 95% of total passengers in China

Chinese airports had revenues of US$ 11.8 billion in 2014

Only 25% of Chinese airports were profitable in 2014

$78 billion in USD will be spent on regional airports in China in 2015

77

Not only have international passengers grown significantly, but so have the number of airports with international service

AVIATION IN CHINA

0

20

40

60

80

100

120

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Mill

ion

s

International O&D Passenger Growth to/from Mainland China

(2006 – 2015*)

25

35

45

55

65

75

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Number of Airports in China with International Service

(2005 – 2015)

Note: Mainland China; *YE September 2015Source: OAG, ICF analysis

88

The top 20 Chinese airports are dominated by full service carriers but low cost carriers continue to have a presence

AVIATION IN CHINA

Source: CAPA; OAG analysis

0

0.5

1

1.5

2

2.5

PEK PVG CAN SHA SZX KMG XIY CTU CKG HGH XMN WUH NKG CSX CGO URC TAO HAK SYX TSN

Seat

s (m

illio

ns)

2015, Seats at the Top 20 Chinese Airports by Full Service Carriers and Low Cost Carriers

Full Service Carrier

LCC

99

Although low cost carriers have grown in the last five years, full service carriers have grown faster and dominate in China

AVIATION IN CHINA

0

100

200

300

400

500

600

2010 2015

Mill

ion

s

Mainland China Departing Seats2010 vs 2015

FSC Seats LCC Seats

Note: Mainland ChinaSource: IATA SRS Schedule Analyser

10% CAGR for FSC seats7.2% CAGR for LCC seats

10

Each Chinese hub has a strong global alliance presence, impacting the carriers who operate and the amount of connecting traffic

Source: OAG Schedules (December 2015); ACI

Seat Capacity Share by Alliance at

Top Chinese Airports Shanghai has two

airports and Beijing is in the process of building a second airport due to operational constraints

Two airports in one city causes operational difficulties for hub carriers or carriers connecting through alliance partners

Connecting passengers in Beijing grew 2.6% from 2013 to 2014, while Shanghai’s growth was 30.9 %

AVIATION IN CHINA

11%

50%15%

24%

51%

7%

16%

26%

34%

3%

44%

19%

39%11%

28%22%

SkyTeam

oneworld

Star Alliance

Unaligned

PEK

PVG

HKG

TPE

62%

2%

19%17%CAN

1111

International market share shifted slightly in five years with the top 3 carriers moving from 36% share to 34%, while airlines such as Xiamen and Hong Kong Airlines have grown in the market

AVIATION IN CHINA

China Eastern Airlines12%

Air China11%

China Southern Airlines

11%

Dragonair5%*

Korean Air4%

Asiana Airlines4%

Xiamen Airlines Company

3%

Hong Kong Airlines2%

Other48%

2015 InternationalSeat Share by Carrier for Mainland China

Air China13%

China Eastern Airlines

13%

China Southern Airlines

10%

Dragonair8%

Asiana Airlines5%

Korean Air4%

All Nippon Airways

3%

Japan Airlines3%

Other41%

2010 InternationalSeat Share by Carrier for Mainland China

Note: Mainland China; *Does not include 0.7% for Cathay PacificSource: OAG, ICF analysis

1212

The number of unique international city pairs has grown on average 14% each year demonstrating the local market growth between cities

AVIATION IN CHINA

524

1019

0

200

400

600

800

1000

1200

2010 2015

Nu

mb

er o

f C

ity

Pair

s

Unique International City Pairs from Mainland China to the rest of the World

2010 vs. 2015

Note: Mainland ChinaSource: OAG, ICF analysis

1313

China continues to demonstrate potential growth but not without some challenges

Investment in airport infrastructure continues to be of paramount importance

Chinese airlines must operate within government controls

– The government must approve aircraft purchases

– Slot controls at airports help home carriers but force non-Chinese carriers to serve other markets in Asia

ATC and airspace continue to be a major constraint

Chinese carriers are still figuring out how to market to international travelers

Long haul routes from China are limited to one Chinese carrier

Codeshares into Chinese markets are limited based on bi-laterals

Incheon and Narita are formidable competitors for connecting Asian traffic

Managing the balance of full service carriers and low cost carriers to ensure a competitive environment

AVIATION IN CHINA

1414

Thank you!For questions regarding this presentation, please contact:

Dr. Jonathan BeardVice-PresidentICF Internationaljonathan.beard@icfi.com

icfi.com/aviation

SingaporeYong Kang Kay - yongkang.tay@icfi.com

BeijingMA, Min - min.ma@icfi.com